ORDER TYPES: THE BASICS

To the day trader, using the right price order is just as important as using the right tool for the right job is to the mechanic or carpenter. If you believe that the Japanese Yen is going to go up in value, you can buy the contract now with the hope of selling it at a higher price and making a profit. If you believe the price of the Japanese Yen is going to go down, then you can sell a contract now ( selling short ) with the hope of buying it back at a lower price and making a profit. Using the right orders can spell the difference between profits and losses. Using a market order when a stop or a limit order should have been used may result in a poor price fill which will cost you dollars.

STANDARD DAY TRADING ORDERS:

Market Orders

This order tells the broker to buy or sell the currency at the best price he can get as quickly as he can. Market orders are designed for quick entry or exit when timing is more important than a tick one way or the other. Market orders are most often used by the day trader to enter the market. Rarely will a market order be filled at the exact price you are expecting. Typically, a market order will cost you one tick and at times even two. However, not using market orders will cause you to risk not getting in a position at all or not being able to exit a position either.

As an example, you may see on your quote screen that the market is at 6150. Normally this means that the market is "bid" at 6148 or 6149 and "asked" or "offered" at 6151 or 6152. If you place a market order to buy you will have to pay the asked price and will most likely fill at 6151 or 6152. If the market is rising at the time you placed that market to buy, you will most likely get filled at an even higher price, depending on how fast the market is moving. The "asked" price, for example may keep going up from 6152 to 6153 to 6154 to 6156 until there is finally a trade at 6157!

Since the trading floor is a competitive environment not everyone is going to fill their contracts at the same price. When the market starts rising sharply ( like following a bullish report ) offers to sell dry up and brokers chase a limited supply of sell offers or start bidding even higher prices. One reason they bid so aggressively is because they are trying to fill market orders that need to be executed as quickly as possible and the broker is compelled to continue bidding until he finds someone who is willing to sell to him. This is the reason why you may sometimes be very disappointed with a fill you get on a market order. Your fill price is, however, an accurate picture of exactly where the market was when your order was on the trading floor at that time.

Limit Orders

Limit orders are given to buy or sell at a stated price or better. The limit qualifier, as the term suggests, limits the floor trader from buying or selling the currency at a price any worse than is specified. It can be used to enter or exit the market when getting a specific price is important. If the market price goes through your stated price you are assured of getting your price. Limit orders are often used by the day trader who wants to make sure they get their exact target price or better.

Stop Orders

Stop orders are placed either above or below the market. Technically, these are orders that wait for a specific price to be activated and become "Market" orders at that time. These orders are especially good for exiting a position when the trade is going against you or for entering markets on a breakout. The only problem with stop orders is that you will not necessarily be filled at your price in a fast moving market.

Contrary to popular belief, stop orders are not related to market positions you may have. No working order is ever directly related to a market position - remember that! For example, lets say that you had entered the market on the long side and placed a sell stop order to get out if the market fell. If the market does not fall but rises and you get out with a profit, your stop order is still a working order until you cancel it, or it fills. If you had the exited the market and later the market falls and hits that stop order, you would then go short as this stop order would now establish a new short position. Stop Orders are many times used as insurance vehicles to protect against huge losses in the event that the trade goes in the opposite direction of what you had anticipated.

One Cancels the Other ( OCO )

This type of order allows a trader to enter two different kinds of orders simultaneously with the cancellation of one contingent upon the fulfillment of the other. Day Traders often use OCO orders to enter their "Limit" and "Stop" orders after they have received their fill price on the "Market" order. We strongly recommend using OCO orders to avoid getting unwanted fills on orders that you might forget to cancel.

Market at Close ( MOC )

This tells the broker that you want to either buy or sell at the market but only on the close of the market. These orders are executed in what is called the "closing range" of the market. The closing range is normally the last minute of the market's trading for the day. MOC orders normally should be entered at least fifteen minutes prior to the close and not canceled in the last five minutes of trading. Many traders often refer to MOC's as "murder-on close" orders, since fills are often not the best prices.